On the first day of its fiscal year, Ebert Company issued $12,500,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert receiving cash of $10,873,974. The company uses the interest method.

Required:

a. Journalize the entries to record the following transactions. Refer to the Chart of Accounts for exact wording of account titles.

1.	Sale of the bonds on January 1.
2.	First semiannual interest payment on June 30, including amortization of discount. Round to the nearest dollar.
3.	Second semiannual interest payment on December 31, including amortization of discount. Round to the nearest dollar.

b. Compute the amount of the bond interest expense for the first year.

c. Explain why the company was able to issue the bonds for only $10,873,974 rather than for the face amount of $12,500,000.

b. Compute the amount of the bond interest expense for the first year. Enter amounts as a positive number.

Annual interest paid
Discount amortized
Interest expense for first year

c. Explain why the company was able to issue the bonds for only $10,873,974 rather than for the face amount of $12,500,000.

The bonds sell for less than their face amount because the market rate of interest is the contract rate of interest. Investors willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate).